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The China Challenge

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Huhua Cao
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Vivienne Poy

Canada-China: the growing interdependence

Chapter 11. The Transformative Effects of the Global Economic Crisis: Implications for the World and Shanghai’s Aspirations

The Keynote Address to the International Business Leaders’ Advisory Council for the Mayor of Shanghai, November 1, 2009

Thomas d’Aquino

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1It is a special privilege for me to deliver this address in the great city of Shanghai on the occasion of the 2009 meeting of the International Business Leaders’ Advisory Council. I am pleased that among the very talented group of Advisory Council business leaders is my colleague and friend Laurent Beaudoin, whose company, Bombardier, is a global leader in rail equipment and civil aviation manufacturing, a company that exemplifies the commitment of Canadian business to China.

2Mayor Han, you have vividly demonstrated to us in your address this morning and in the events you graciously included us in yesterday that you are no ordinary Mayor and that Shanghai is no ordinary city. We were all moved, I am sure, by the drama of the new Yangtze River tunnel and bridge, by the tenderness in the release of birds at Dongtan Wetland Park, and by the beauty of last night’s performance in the splendid architecture of the Oriental Art Center.

3As we meet in Shanghai, the impact of the most severe global economic crisis since the Great Depression of the 1930s continues to reverberate. One of the notable aspects of the crisis is its global reach. People, businesses and governments in every part of the world have felt its sting. This surprised some observers, who argued that parts of the world could somehow be isolated from one another, that the crisis could in effect be quarantined. This turned out to be impossible. Regardless of where we live, we are all actors on a global stage.

4I am a believer in the benefits of globalization, as I know you are, Mayor Han, and as I know are the outward-looking people of this dynamic city. It is a plain fact that globalization has accelerated economic progress, lifted hundreds of millions of people out of poverty, spurred innovation and scientific advancement, and brought people, cities and countries closer together, ensuring that we are better able to confront challenges that touch us all, whether the challenge be a financial crisis, a devastating earthquake, a killer tsunami or a raging pandemic. Understandably, not everyone is convinced of the virtues of globalization, especially in difficult economic times. Looking around the world, we know that the benefits of rapid globalization are not equitably shared. This takes time, to be sure, but the forces that are propelling globalization, spurred on by ground-breaking networking technologies, are stronger than ever. United Nations Secretary General Kofi Annan once offered a telling perspective: “Arguing against globalization,” he said, “is like arguing against the laws of gravity.”

5There are signs of hope that the worst of the economic crisis has passed. Output has stopped shrinking in the world’s largest economies, stock markets have rallied, company inventories are being replenished, financial markets are beginning to thaw, and confidence is re-emerging. It is heartening, for example, that the International Monetary Fund is now predicting that global GDP will expand by 3.1 percent next year. However, we cannot ignore that in most parts of the world unemployment is still on the rise, business continues to face tough conditions, a large amount of global manufacturing capacity remains idle, many financial institutions are still shaky, and governments are saddled with huge and growing fiscal obligations. As our Chinese hosts know firsthand, China has not been immune. The global nature of the recession, the pullback of consumers in the United States and elsewhere, and the precipitous fall of international trade volumes, the worst since the Great Depression, have meant job losses and industrial contraction even in this country, where growth continues to be impressive.

6Looking ahead five years, even ten years, what will the global economic landscape look like? I believe that the answer, in large measure, will depend on how the major developed and emerging economies face up to a number of critical challenges. I am going to mention five of them.

7In dealing with these challenges, China is destined to play a key role. This country’s remarkable transformation of the past three decades in political, economic, trade and financial power continues without significant interruption. GDP over this period has multiplied more than eighty times and, according to the People’s Bank of China, China’s foreign exchange reserves now are approaching US$ 2.3 trillion. Forecasts point to China achieving 8.1 percent growth in 2009, a more than respectable showing against a backdrop of global recession. Data released in recent days point to momentum in China that could very well lead to even higher growth this year. However bright China’s prospects are, Chinese leaders have rightly identified the need to achieve a recovery from the effects of the crisis that is sustainable. Last month, in a speech to the World Economic Forum in Dalian, Premier Wen Jiabao acknowledged that China’s economic recovery “is not yet steady, solid and balanced.” The Premier’s frank assertion underscores a growing consensus among thought leaders in China that urgent priorities need attention. Key among them are the need to accelerate unfulfilled economic reforms, to deal with widespread poverty and widening income disparity, to respond to serious environmental problems, and to foster expanded domestic consumption.

8As China and the world look beyond the economic crisis, what are the most urgent challenges that need to be addressed? The first is to gain a proper perspective on the crisis itself. While it is true that the direct causes of the crisis—the combustible mixture of excess leverage in both consumer and financial markets, the bank failures, the credit collapse and the contagion to the broader economy—have led to painful consequences, it would be folly to conclude that the foundations of market economics have been irreparably damaged. A serious failure in the conduct of global finance should not result in the wholesale condemnation of a market system that in large measure functions responsibly, a market based on the rule of law and ethical principles, a market that promotes competition and innovation. As has been amply demonstrated in recent decades, a market that functions responsibly offers the best hope to people who seek a better and more secure life, wherever in the world they may live. This is absolutely fundamental.

9A second challenge facing the global community is how to deal intelligently with the huge fiscal challenges ahead. The robust response of central banks and governments to the economic crisis may very well have averted a global catastrophe. Their actions certainly stemmed public panic, helped to restore the conditions for an eventual return to stability and confidence, and launched a healthy debate about a wide range of possible financial reforms. At the same time, however, governments have assumed massive fiscal obligations that will take many years to unwind. The IMF points out that, in the G20 as a whole, deficits have grown from 1.1 percent of collective GDP in 2007 to 8.1 percent in 2009. The Fund further predicts that government debt in the advanced G20 countries will rise from a pre-crisis average of seventy-nine percent of GDP to 120 percent in 2014. These are staggering numbers. As governments face up to this fiscal challenge, two risks must be carefully balanced. On the one hand, it is vital that fiscal stimulus measures not be withdrawn too quickly, for fear that the slowly emerging recovery will be snuffed out. On the other hand, fiscal stimulus that is sustained for too long will fuel already abundant fears of a massive spike in inflation, and the emergence of new and ever more dangerous asset bubbles. Countries with looming demographic pressures and unaffordable entitlement programmes face additional risks. What is needed is for countries to develop and execute smart “exit” strategies. This requires a determined pullback in government spending as the private sector returns to growth. Not an easy task: as we all know, the politics of unwinding government programmes can be daunting. Here political courage and good public policy go hand in hand. Given the interdependence of the global economy, close coordination on this front by the G20 nations is crucial.

10A third challenge that must be addressed if the global economy is to return to stable growth is protectionism. Despite exhortations by G8 and G20 leaders to stop growing protectionism in its tracks, examples abound throughout the world as political authorities offer preferences to home-based businesses and seek ways to cushion rising unemployment. The severity of the problem was underscored recently by the Geneva-based World Trade Alliance. It claims that, on average, a G20 country has violated the “no new protectionism” pledge once every three days since it was made last November.

11Last week’s report of the authoritative Netherlands Bureau for Economic Policy suggests that the dramatic contraction in global trade, estimated at close to twelve percent this year, may not be reversing itself as quickly as hoped. In the face of these gloomy statistics there is much that should concern us. Trade rules are being flouted regularly in developed and emerging countries alike. Again and again, short-term political expediency is trumping the rule of law and common sense. The world continues to spin away from the goal of a single, credible and effective set of multilateral trade rules. The Doha Round is paralyzed and its prospects are dim. In its place, a patchwork of bilateral and regional trade agreements is growing in size and complexity. The time for action is long overdue. Here it would be apt to reflect on the teachings of Confucius, who said, “Looking at small advantages prevents great affairs from being accomplished.”

12Let me turn now to a fourth challenge that deserves urgent attention. In Pittsburgh this past September G20 leaders acknowledged that the global economy is out of balance and that this is one of the reasons for the financial crisis. Excessive reliance on external demand carries with it real consequences, as does excessive reliance on foreign investors to finance consumption and deficits for long periods of time. As we have found, such imbalances can cause serious and long-lasting economic damage. Over the past year these imbalances have started to unwind. For example, the current account deficit of the United States has dropped from about five percent of GDP in 2008 to less than three percent in the second quarter of 2009. Meanwhile, China’s current account surplus has declined from about ten percent of GDP in the first half of 2008 to 6.5 percent in the first half of 2009. With these trends moving in the right direction, I would argue that a return to ever-increasing imbalances in global trade and capital markets must be avoided at all costs. Otherwise, we risk precipitating yet another crisis, with even greater negative consequences for the global economy.

13So what should we do? Put simply, Americans in particular are going to have to save more of their income and consume less, and Asian economies will have to foster greater domestic demand. In both cases, this is far easier said than done. There is no magic set of policy prescriptions to motivate individuals to change their habits so as to dramatically increase savings on the one hand and consumption on the other. In the case of the United States, with recovery, the federal government must put in place a credible exit strategy. This means achieving balanced budgets over an economic cycle. This goal will be out of reach unless health care costs are contained, taxes on consumption are raised, social security reforms are implemented and “pay as you go” spending is embraced. In the case of the Asian economies, and especially China, the shift towards expanded consumption should focus on strengthened pension schemes, and increased government spending on health care and education. Earlier this year, McKinsey & Company reported that the development of service industries and easier access to consumer products and credit could increase domestic demand in China by more than US$ 2 trillion by 2025.

14In my view, China, in addition, will have to come to terms with the issue of exchange rate flexibility. With the global recovery, China’s exports are growing once again and more capital is flowing back into the country, raising expectations for currency appreciation. The alternative is future price inflation in certain asset classes. Chinese central bank Vice Governor Ma Delun recently highlighted the risk that asset bubbles could begin to build within China as the economy roars back to life. There needs to be an outlet, and that outlet should be to allow the currency to appreciate.

15There is also the challenge, or opportunity, of what to do with China’s immense foreign exchange reserves. A Chinese think tank has come up with an intriguing idea: that the reserves could be put to good use through the development of a “Marshall Plan” for Africa, Asia and Latin America. Such a development fund, or loan facility, would increase living standards in the targeted countries. These funds would ignite new engines of global growth and recovery to offset lower American and European consumption. Perhaps China’s leadership will consider such a bold move. Indeed, President Hu Jintao has acknowledged the role of global imbalances as a key contributor to the financial crisis and to negative impacts on “global wealth distribution, resource availability and consumption, and the international monetary system.” Putting the enormous supply of China’s foreign reserves towards greater development would go some way to answering the challenge of imbalances in the global economy.

16Let me turn now to a fifth enormously complex challenge that deserves attention. In a few weeks the world’s eyes will turn to Copenhagen, as some 190 governments attempt to negotiate a more robust global plan to tackle climate change. I sometimes feel that we have loaded so many expectations onto the climate change agenda, and the Copenhagen summit in particular, that it cannot help but fail. To listen to the rhetoric, you would think that tackling this issue will give us vast new sources of cleaner energy, spawn whole new industries of clean technology, almost single-handedly cure unemployment through the growth of millions of “green” jobs, and allow for the transfer of massive amounts of financial and technological aid to emerging economies. I have always believed that we should have lofty aspirations and continually challenge ourselves to do better, but in the politically charged and confusing debate around climate change it is easy to forget fundamental realities. For example, that climate change affects every man, woman and child on Earth, and therefore we must find new ways for all nations to contribute, according to their capabilities and strengths, to a lower carbon future. I know that some of you will say that the developed world has had 200 years of industrial activity and wealth accumulation, and therefore must act first. This is undoubtedly true, but the simple fact is that, going forward, the developing world will account for significantly more than half of annual global emissions. Unless the rapidly emerging economies become key players, there can be no solution.

17China’s leadership is pivotal. Having recently overtaken the United States as the world’s largest producer of greenhouse gases, your country has a vital stake in achieving a global consensus on tackling climate change. Your leaders have acknowledged the primacy of improving environmental quality at home. The simple fact is that the health of China’s citizenry, the liveability of China’s cities, and the competitiveness of China’s workforce and industries will depend heavily on embracing advanced environmental standards and green technologies.

18This leads me to some relatively simple propositions about the role of business going forward. First, we must encourage our political leaders to work harder to forge an international climate change plan that is fair, effective, affordable and sustainable. In each of our countries we can do more to foster policy that integrates economic development, energy and the environment. We must push our governments to adopt policies that incent new technologies, rather than encouraging them to hide behind green protectionism or the false hope of weakened intellectual property rights. Whatever the outcome in Copenhagen, we need a framework that will unleash the creativity of the market, whether it be in renewable energy, advanced materials with a much lower environmental impact, or leading-edge technologies such as clean coal or carbon sequestration. Businesses themselves, throughout the world, have to step up to the plate. Even in challenging times, we need to greatly enhance our investment in research and development and commercialization of lower-carbon energy, products and services. We need to build direct business-to-business engagement, and foreign investment and technology partnerships. As we already see happening here in China, such partnerships create innovative capacity in both the developers and the adopters of new technologies. The centrality of these new technologies to long-term prosperity cannot be overemphasized. This is a point that President Obama made last week in an address to the Massachusetts Institute of Technology when he said: “From China to India, from Japan to Germany, nations everywhere are racing to develop newer ways to produce and use energy. The nation that wins this competition will be the nation that leads the global economy.”

19Mayor Han, responding decisively to the five challenges I have outlined this morning, I believe, is essential if we are to build a prosperous and peaceful world. Success will require a degree of cooperation among countries and peoples unprecedented in our lifetimes. The global economic crisis has been a powerful catalyst and, in one respect at least, it has been beneficial. In shaking our confidence and our institutions, it has compelled us all to think about how we can create a better world. This indeed is a crisis that must not be wasted.

20The response to the crisis is taking many forms. It has given prominence and momentum to the G20, signalling a seismic shift in the architecture of global governance. While the G20 may lack the cohesion of the G8, its greatest virtue is that it brings to the table the most important global players. The hard truth is that the challenges I have outlined—restoring faith in the market, balancing growth and fiscal responsibility, defeating protectionism, bringing balance to world finances and achieving a cleaner, more sustainable environment—cannot be realized without a new consensus among the global heavyweights. In recent public debate, some have argued that the task of building such a consensus should fall primarily on China and the United States, the so-called G2. This, in my view, would be a mistake. While cooperation between China and the United States is essential in dealing with a host of political, economic and security issues, I believe that the interests of China, the United States and the global community as a whole would be better served in a multipolar world guided by effective multilateral institutions.

21In such a world, one in which the ideas and vitality of many countries and peoples interact, the role of cities is central. We are here today as your guests, Mayor Han, because we share your view that Shanghai is destined to be among the greatest of cities in the 21st century. Shortly, we will hear the views of various business leaders from around the world on what it takes to aspire to the front ranks of urban achievement and excellence. In my view, “quality of life” should be the ultimate determinant of rank.

22In June the Economist Intelligence Unit released its Liveability Ranking of 140 cities around the world. It rates more than thirty factors across five categories: stability, health care, culture and environment, education and infrastructure. We Canadians are pleased to find that Vancouver once again was ranked first, and two other Canadian cities, Toronto and Calgary, were among the top ten. Shanghai is making progress on these fronts. With an international trade volume of some US$ 600 billion in 2008, its financial strength and its strategic position in the Yangtze River delta, it has staggering potential. The city government’s plan to build four centres for international economics, finance, shipping, and trade and services by 2020 signals a wise selection of priorities for moving forward. This plan and your speech this morning, Mayor Han, signal a continuing shift from labour-intensive to capital- and knowledge-based industries. This entails the need to attract diverse and world-class skilled workers at the same time as devoting more resources to education and training. It implies improvements in infrastructure. It implies “going green” in a massive way, embracing the most advanced sustainable technologies. It makes clear the need for a sound legal system and best practices in accounting, regulation and governance. Most fundamentally, it implies an open economy, where capital, goods, services and people move freely. In the pursuit of all these objectives the citizens of Shanghai and the people of China will be greatly inspired by World Expo 2010. So will the approximately 70 million visitors who are expected to witness firsthand the meaning of the Expo motto, “Better city, better life.”

23Mayor Han, I wish you, and the hard-working and creative people of Shanghai, every success as you continue your impressive efforts to make your city a 21st-century leader. I have no doubt that you will succeed. China and the world will be a better place for it.

Auteur

Entrepreneur, lawyer, author, educator and corporate director. He is Chairman and Chief Executive of Intercounsel Ltd, a private company engaged in providing strategic solutions and in advancing transformational change. He is also Senior Counsel at Gowlings, one of Canada’s largest law firms, chairs the firm’s Business Strategy and Public Policy Group and is a member of the Gowlings International Strategic Advisory Group.
Mr. d’Aquino serves on the Board of Directors of Manulife Financial Corporation, CGI Group Inc., and Coril Holdings Ltd. and is Chairman of the National Gallery of Canada Foundation.
He is associated with two of Canada’s leading academic institutions: as Distinguished Visiting Professor, Global Business and Public Policy Strategies at Carleton University’s Norman Paterson School of International Affairs; and as Honorary Professor at The University of Western Ontario’s Richard Ivey School of Business. Earlier in his career, he served as Special Assistant to the Prime Minister of Canada and as Adjunct Professor of Law at the University of Ottawa lecturing on the law of international trade and global business transactions.
From 1981 to 2009, Mr. d’Aquino was Chief Executive and President of the Canadian Council of Chief Executives (CCCE), an organization composed of the chief executives of 150 of the country’s leading enterprises and pre-eminent entrepreneurs. Mr. d’Aquino assumed leadership of the Council in its formative stages. Upon his retirement from the CCCE as of December 31, 2009, member companies accounted for $850 billion in annual revenues and $4.5 trillion in assets. With a combined Canadian stock market value of $675 billion, the companies are responsible for the majority of Canada’s private sector exports, investment and training. In recognition of his exemplary leadership, he was named by the Canadian Council of Chief Executives Board of Directors, a Distinguished Life Time Member.
A native of Nelson, British Columbia, Mr. d’Aquino was educated at the Universities of British Columbia, Queen’s and London (University College and the London School of Economics). He holds B.A., LL.B., and LL.M. degrees, and an Honorary Degree of Doctor of Laws from Queen’s University and from Wilfrid Laurier University.
Mr. d’Aquino has been referred to as Canada’s most influential policy strategist and the country’s leading global business ambassador. He is the author of numerous publications including the influential book Northern Edge: How Canadian Can Triumph in the Global Economy. He is a regular commentator on radio and television, and a frequent speaker on platforms in Canada, the United States, Europe, Asia and Latin America. Mr. d’Aquino has addressed audiences in forty countries and in over one hundred cities worldwide

© Les Presses de l’Université d’Ottawa | University of Ottawa Press, 2011

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